UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 10, 2010

Bailment in the UAE

 

 

Article 1068 of the Civil Transactions Law, Federal Law No. 5 of 1985 (the “Law”):

  1. Bail is a commitment by the bailer to ensure the appearance of the bailee at the time fixed upon the request of a beneficiary; if he fails to do so, the judge may order him to pay exemplary damages, and he may exempt him from it if he proves his inability to secure his appearance.
  2. The bailer who undertakes to pay a certain amount as a penal condition if he fails to bring the bailee shall be liable to pay said amount.  However, the judge may exempt him from payment of such an amount in whole or in part if he proves his inability to bring the bailee.

Article 1069 of the Law:

If a bailer pledges to pay the debt upon failure to surrender the bailee, he shall be liable to pay the debt if he fails to secure his surrender. 

Article 1070 of the Law:

  1. The bailer shall be discharged of obligation if he surrenders the bailee or if he performs the object of the bail.
  2. He shall also be discharged of obligation upon the death of the bailee but he shall not be discharged upon the death of the creditor in whose favor the bail is made and his heirs shall be entitled to request the bailer to surrender the bailee at the fixed time.

Article 1071 of the Law:

The bailee must be surrendered at the place fixed by the bailer and if such a place is not fixed, he shall be surrendered at the place of the contract.

Article 1072 of the Law:

If a bailer pays the obligation due to the absence of the bailee and his inability to secure his presence and then it appears that the bailee has died before payment of the obligation, the bailer shall recover what has been paid by him.

Article 1073 of the Law:

If it is not shown in the bail bond whether it is guarantee for property or bail of a person and if neither one could be specifically identified, it shall be regarded as a guarantee for property.  However, if the bailer contends that it is intended to be bail of a person and the creditor contends that it is intended to be a guarantee for property, the bailer’s a statement  given under oath shall prevail.

Article 1074 of the Law:

The husband may object to a guarantee given by his wife without his permission even if the debt of whomever she guaranteed is less than one third of her property.

UAE Banking Series Part V: Guarantees

 

 

A bank guarantee is an undertaking by a bank to meet the customer’s debt to another party on the agreed terms contained in the guarantee, which may be for a specified or unspecified period.

A bank guarantee is a joint and several obligation.

A bank guarantee is deemed a commercial act, whatever the capacity of the party guaranteed or the purpose to which it is allocated.

A letter of guarantee is an undertaking given by the guarantor bank at the request of a customer unconditionally to pay a specified or a specifiable sum to the beneficiary, unless it is made conditional, if so requested, within the period specified in the guarantee.  The letter of guarantee states the purpose for which it is being provided.

The bank may not refuse to make payment to a beneficiary for a reason attributable to the relationship of the bank to the order or to the orderer of the beneficiary, except by court order.

During the validity period of the letter of guarantee, the bank shall be released of liability to the beneficiary if it doesn’t receive a demand to pay from the beneficiary unless prior to the termination of this period it is expressly agreed to renew it.

If the bank pays the beneficiary the sum agreed in the letter of guarantee, it shall replace him in recourse upon the customer for the amount of the sum it has paid.

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates (Laws Relating to Banking) 

According to Article 1056 of the Civil Transactions Law, Federal Law No. 5 of 1985 (the “Law”), ‘A guaranty is an undertaking to join the liability of one person (the guarantor) with the liability of a debtor in performing his obligation. 

Article 1057 of the Law:

  1. A guaranty shall be made by expressing its word as well as by the words of the undertaking.
  2. The offer made by a guarantor is sufficient for its conclusion and effectiveness unless the person in whose favor it is given rejects.

Article 1058 of the Law:

A guaranty shall not be valid unless the guarantor is capable of donating.

Article 1059 of the Law:

A guaranty shall be void if the guarantor reserves for himself the ‘condition option.’

Article  1060 of the Law:

A guaranty shall be valid if it is perfect, restricted to a proper condition, dependent upon a convenient condition, contingent upon a future time, or provisional.

Article  1061 of the Law:

A guaranty shall not be valid unless the security is given on a principle debt, real property or a thing certain in amount and provided that the guarantor is capable of delivering the object of guaranty.

Article 1062 of the Law:

A guaranty may be made for maintenance costs of the wife and relatives and it shall be valid even before it is decided by law or by consent.

Article  1063 of the Law:

A guaranty shall not be valid if it is given by the representative of a seller to a buyer on payment of the price of anything he has been authorized to sell, nor shall the guaranty of a guardian on the proceeds of a minor’s property or the guaranty of a trustee on the proceeds of whatever he sells of the endowment (waqf) property.

Article  1064 of the Law:

  1. The guaranty of a terminally sick person shall not be valid if his property is overburdened with debts.
  2. However, his guaranty shall be valid if his property is not heavily burdened with debts, and it shall be subject to the provisions of the will.

Article 1065 of the Law:

A guaranty given on condition of discharging the principal in an assignment of debt, and the assignment made on condition of non discharging of the assignor shall be a guaranty.

Article  1066 of the Law:

The guarantor who gives a suspended or contingent guaranty may revoke the guaranty before the debt becomes due.

Article  1067 of the Law:

The guaranty shall include accessories of the debt and expense of the claim unless it is otherwise agreed.

Article 1075 of the Law:

A maturity guarantee is a surety for payment of the price of the sold item if it becomes mature.

Article 1076 of the Law:

No claim shall be raised against the person who provides a maturity guarantee in favor of a seller unless the entitlement of the sold item has been decided and the seller has been ordered to return the price.

On Guarantors and Creditors

According to Article 1077 of the Law:

‘1. A guarantor shall honor his or her obligation upon maturity.

2. If his obligation is dependent on a condition, the obligation shall be honored when the condition is satisfied.

According to Article 1078 of the Law:

1. A creditor may raise a claim against the principal and the guarantor jointly or severally. 

2. If a guarantor is guaranteed by another, the creditor may raise a claim against either of them as he wishes.  3. However, his claim against either of them shall not abrogate his right to make a claim against others.  

Article  1079 of the Law:

A guarantee may be restricted to a condition that payment of a debt shall be made out of the debtor’s money held with the guarantor subject to the approval of the debtor.

Article  1080 of the Law:

If a guaranty is made unconditional, the obligation of the guarantor shall be dependent on the obligation of the principal whether advanced or deferred.

Article  1081 of the Law:

If a person guarantees an advanced debt with a deferred surety, the debt owed against the guarantor and the principal together shall be deferred unless the guarantor attributes the deferment of debt to himself or the creditor stipulates the deferment for the guarantor in which case the debt shall not be deferred for the principal.

Article  1082 of the Law:

If a real security has been given as a pledge for the debt before the guaranty and the guarantor has stipulated to make recourse against the principal at first, execution may not be made against the property of the guarantor before making execution on the properties given as security for the debt.

Article  1083 of the Law:

The guarantor’s guarantor may stipulate that the creditor must initially take recourse against the first guarantor.

Article  1084 of the Law:

If a guarantor or a debtor dies before the deferred debt falls due, the debt shall be owed against the legacy of the deceased.

Article  1085 of the Law:

If guarantors of one debt are several, a claim for the  whole debt may be raised against each one of them unless they have jointly guaranteed the debt under one contract and their joint liability is not stipulated, then no claim shall be raised against any one of them except to the extent of his share.

Article  1086 of the Law:

If the guarantors are jointly liable and any one of them honors the debt when it falls due, he may take recourse against all other guarantors for his share in the debt and for his portion in the share of the one who is declared bankrupt.

Article  1087 of the Law:

A guaranty given under the law or by adjudication requires the joint liability of the guarantors.

Article  1088 of the Law:

If a creditor receives anything else against his debt, the principal and the guarantor shall be discharged of the obligation unless said thing falls due.

Article  1089 of the Law:

A creditor whose debtor becomes bankrupt shall claim his debt in the bankruptcy otherwise his right of recourse against the guarantor shall be extinguished to the extent of harm caused by his lack of diligence.

Article  1090 of the Law:

  1. The guarantor may not take recourse against the principal for anything he pays on his behalf unless the guaranty is made at his request or with his approval and the guarantor has honored it. 
  2. He shall not also take recourse for a deferred debt paid by him in advance unless such debt becomes due.

Article  1091 of the Law:

  1. Upon settlement of a debt by a guarantor, the debtor shall hand over to the guarantor all the documents which enable him to exercise him to exercise his right to take recourse against the debtor. 
  2. If the debt is guaranteed by another real security, the creditor must relinquish it to the guarantor if it is a moveable asset or transfer his right to him if it is a real property, provided that the guarantor shall incur the expenses of such a transfer and makes recourse for them against the debtor.

Article  1092 of the Law:

If a debt becomes due, the creditor shall make a claim for it within six months from the date of maturity, otherwise, the guarantor shall not be considered bound by his guaranty.

Between A Guarantor and A Debtor

Article  1093 of the Law:

  1. If a guarantor gives anything else as consideration for the debt, he shall make recourse against the debtor for what he has guaranteed, and not for what he has paid. 
  2. However, if he compounds with a creditor for a certain amount of the debt, he shall make recourse against the debtor for what he has paid by compromise and not for the entire debt.

Article  1094 of the Law:

  1. If a principal pays the debt before the guarantor or if he comes to know of a reason that prevents the creditor from claiming the debt, he shall inform the guarantor thereof, and if he fails to do so and the guarantor pays the debt, the latter may have the option to make recourse against the principal or against the creditor.
  2. If a legal action is filed against a guarantor, he shall join the principal as a party thereto and if he fails to do so, the principal may plead against him by all objections that enable him to rebut the creditor’s claim.

Article  1095 of the Law:

A guarantor who provides surety or bail may request the judiciary to prevent the guaranteed party from travelling abroad if the guaranty is made at his request and there are indications that harm may be caused to the guarantor.

 Article  1096 of the Law:

The guarantor shall have the right of recourse against the debtor for whatever expenses paid by him in implementation of the conditions of the guaranty.

Article  1097 of the Law:

In case of joint debtors, whoever has guaranteed them at their request shall have the right of recourse against any of them for whatever debt paid by him.

Article 1098 of the Law:

A guarantor may not take a consideration for his guaranty, however, if he takes it, he must make restitution thereof to its owner and his guarantee shall cease to be effective if he takes it form the creditor or from the debtor or from a third party with the knowledge of the creditor.  However, if he take the consideration without his knowledge, he shall be bound to perform the guaranty and to make restitution of the consideration. 

Expiration of the Guaranty

Article  1099 of the Law:

A guaranty shall expire in the following cases:

  1. Upon payment of the debt.
  2. Upon deterioration of the real property in the hands of the guaranteed by a force majeure before a claim is made.
  3. Upon termination of the contract under which the right becomes binding upon the guaranteed.
  4. Upon discharging a liability creditor of the guaranty or a debtor of the debt.
  5. Upon death of the guaranteed.
  6. Upon bring the bailee at the designated place after expiry of the bail term, even if the party in whose favor the bail is made refrained from taking delivery thereof, unless a cause beyond his control has prevented from taking delivery thereof.
  7. Upon bringing of the bailee back before the appointed time, provided that no harm is caused to the party in whose favor the bail is given in taking delivery thereof.
  8. Upon of the bailee surrendering himself.

Article  1100 of the Law:

A guarantor of a sale price shall be acquitted of the guaranty upon rescission of the sale or entitlement of the sold property or its restitution for a defect.

Article  1101 of the Law:

If a guarantor or debtor compounds with a creditor for the sum of the debt, they shall both be discharged of the balance.  However, if a stipulation is made for discharging the guarantor alone, the creditor shall have the option either to take the amount compounded for from the guarantor and the remainder from the principal or to relieve the guarantor and claim the entire debt from the principal.

Article  1102 of the Law:

Upon the death of the party in whose favor the guaranty is given the right of claim shall pass to his heirs.

Article  1103 of the Law:

If a creditor dies and his legacy is limited to the debtor, the guarantor shall be acquitted of the guaranty.  However, if he has another inheritor, the guarantor shall be acquitted of the debtor’s share only.

Article  1104 of the Law:

No claim shall be made against a guarantor in a provisional guarantee, except for obligations that ensue during the term of the guaranty.

Article  1105 of the Law:

  1. If a guarantor or a principal creditor assigns the guaranteed debt or part thereof to a third party, and if such assignment of debt is accepted by the assignee, the principal and the guarantor shall be acquitted within the limits of the said assignment.
  2. It if is stipulated in the deed of assignment that the guarantor alone shall be acquitted he shall be exclusively acquitted to the exclusion of the principal. 

 

Federal law No. 18 of 1993, The Commercial Transactions Law (the “CTL”)

Article 411 of the CTL:

  1. The bank guarantee is an undertaking by the bank to pay a customer’s debt to a third party in accordance with such conditions as agreed upon and contained in the guarantee.  The guarantee may be issued for a definite or indefinite period of time.
  2. The bank guarantee is a joint liability.

Article 412 of the CTL:

The bank guarantee may be made in several forms including:

  1. Signature by the bank on a commercial paper as a reserve guarantor, or giving such guarantee on a separate paper, allowing for the guaranteeing of several commercial papers at one time.
  2. Drawing up of an independent contract of the guarantee.
  3. Extending a letter of guarantee by the bank to the customer’s creditor in which the bank guarantees fulfillment by the customer of his obligations.

Article 413 of the CTL:

The bank guarantee is considered a commercial activity, regardless of the capacity of the guaranteed or the purpose for which the guarantee is appropriated.

Article 414 of the CTL:

The letter of guarantee is an undertaking issued by the guaranteeing bank at the request of the customer (Orderer) to unconditionally pay a fixed or a fixable amount to another person (beneficiary) unless the letter of guarantee is conditional if it is so requested within the period specified in the letter.  the letter of guarantee must state the purpose for which it is issued.

Article 415 of the CTL:

  1. The bank may demand provision of a security against issuing the letter of guarantee.
  2. The security may be in cash, commercial papers, securities, goods or an assignment made by the orderer to the bank over his right towards the beneficiary.

Article 416 of the CTL:

The beneficiary may not assign to a third party his right arising from the letter of guarantee except under the consent of the bank.

Article 417 of the CTL:

  1. The bank may not refuse payment to the beneficiary for a reason relating to the relationship of the bank with the orderer or the relationship of the orderer with the beneficiary.
  2. In exceptional cases, the court may under the request of the orderer seize the sum of the guarantee held with the bank provided that the orderer founds his claim on serious and reasonable grounds.

Article 418 of the CTL:

The bank’s liability towards the beneficiary shall be released if no demand for payment is received from the beneficiary during the validity period of the letter of guarantee unless renewal of such period prior to its expiry is expressly agreed upon.

Article 419 of the CTL:

If the bank pays to the beneficiary the amount agreed upon in the letter of guarantee, it shall subrogate him in the recourse order to the orderer for the amount it has paid.

II. Omer Eltom

In Cassation Petition No. 411 of 2003, The Dubai Supreme Court held that:

‘Principally, a letter of guarantee should be unconditional in which case the beneficiary shall be entitled to cash in its value on first demand during the validity period of the guarantee.  However, if it is subject to conditions or the submission of documents to the bank, the beneficiary shall not be entitled to collect its value unless he meets the conditions or submits such documents.  The bank shoulders the burdens of proving that the letter of guarantee is subject to conditions which should be met or documents which should be presented.  In a dispute between the bank and the beneficiary, the burden is on the former on the grounds that it is alleging the contrary of the natural position, i.e. the right of the beneficiary to collect the value of the letter of guarantee immediately upon demand during the validity period.’

Accordingly, a bank guarantee should not be subject to any condition unless the condition is in the text of the letter of guarantee, as it is principally a ‘final undertaking by the bank to pay upon the order of its customer within a specified period, immediately upon the request of the beneficiary.  (Cassation Petition 67 of 2003)

Neither the issuing bank nor the beneficiary can extend the  validity period of the letter of guarantee unilaterally.  (Cassation Petition 312 of 2001)

The obligation of a bank under a letter of guarantee is consistently held to be an obligation that is wholly independent from the applicant’s obligations.  The bank’s obligation is described in cassation petition 148 of 1990 as a self-contained obligation which is not connected with any external elements. 

This position is also explained and confirmed in many reported cases including cassation petition 215 of 2000 in which Dubai Supreme Court held the following:

‘The obligation of the bank which issues the letter of guarantee is independent from that of the guaranteed debtor.  This means that it is distinct from any connection other than the bank’s relationship with the beneficiary, i.e. similar to the position in documentary credits.  Therefore, the issuing bank’s obligation has nothing to do with the validity or otherwise of the debtor’s obligation.  The bank is bound by the letter of guarantee irrespective of the position of the holder of the guaranteed account or the fate of the contracts between the bank and the applicant, or between the latter and the beneficiary.’

From a different perspective, the relationship between the three parties to a letter of guarantee is described in Cassation Petition No. 27 of 1993:

‘A guarantee issued by a bank is not regarded as a contract between the bank and its customer, nor is it regarded as an execution of a contract between the customer and the beneficiary.  The bank becomes finally bound by the guarantee once the guarantee is issued and brought to the attention of the beneficiary.  In issuing the letter of guarantee, a bank is not acting as a representative, agent or guarantor of its customer.  In committing to the letter of guarantee, the bank is acting as a principal.  Accordingly, the bank and its customer each bears an independent obligation towards the beneficiary.  Each of them is subject to a separate relationship giving rise to the obligations and the rules governing such relationships.  The customer pays the bank for the execution of the obligation arising from the existing relationship between the bank and the customer as a cover for the letter of guarantee.  This has nothing to do with the beneficiary.  Accordingly, this is not regarded as an assignment of debt and is not subject to the law applicable to assignments.’

An applicant may in rare situations stop payment of a letter of guarantee by way of an application for garnishment as the funds sought to be attached are already at the disposal of the beneficiary.  Cassation Petition No. 109 of 2001 states:

‘An applicant’s request for a provisional attachment order over the guarantee amount is possible when the applicant has serious and definitive grounds.  The court may only exceptionally deprive the beneficiary from cashing the letter of guarantee after ascertaining that there are strong grounds necessitating such an order.’

UAE Banking Series Part IV: Joint Accounts

 

 

A joint account shall be on an equal basis between the holders unless it is otherwise agreed.  A joint account shall be opened by all its holders or by an attorney having official authority from all holders.

If a freeze is imposed on the balance of a joint account holder, the freeze shall apply to the share of such account holder and  the bank shall suspend withdrawals from the joint account to the equivalent of the frozen share and shall notify the joint holders of the imposition of such a freeze within a period of five days from the date of the freeze. Note: A freeze can be placed on the joint account before the joint account holders are notified of the freeze.

When making a clearance between the various accounts of a joint account holder, the bank may not enter the frozen account into the clearance without the written consent of the other account holders.

The bank must suspend withdrawals from the joint account from the date of  being notified of the death /loss of legal competence of a joint account holder.  Suspension of withdrawals shall be imposed only on the share of the joint account holder who dies/loses legal competence.  However, in the case that it is a husband who dies, the joint account may be wholly frozen until a court order releases the account.

The concept of survivorship is not recognized under the UAE laws.  Accordingly, the share of the deceased lying in joint accounts shall not be payable to the survivor.  The share of the deceased in a joint account shall be released to the legal heirs in accordance with the probate issued by the court.

The special instructions ‘Either or Survivor’ given by joint account holders involve two aspects (i) operation of the account during the life-time of the account holders; and (ii) operation of the account after death of any of them.  During the life time, operation of the account by either of the account holders is allowed.  The second aspect involves operation of the account upon death of any of the holders and the rules governing the estate of the deceased.

Operation of the account after death of one of the account holders is governed by the general principle of agency law.  Accordingly, instructions given by the deceased (principal) to the survivor (agent) ceases to exist by the death of the principal since the agency/power of attorney normally expires upon death of the principal.

Upon death of any of the account holders, the remaining account holders must inform the bank of death within a period of ten days of the death and the bank shall suspend all withdrawals until a successor is appointed.

 

Conclusion: It is best for married couples to hold a majority of their cash in an offshore bank account to ensure accessibility to funds at all times even in the event of death of a spouse.  Furthermore, this may be a good idea if you would like to ensure that on the event of death, the remainder of the money in the account passes according to your will or to the laws of your home jurisdiction. 

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates (Laws Relating to Banking) 

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance